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Cadence Design Seen With Strong Profit, Sales Gains

There's nothing like a new CEO to whip a sagging business back
into shape.

Add to that rising product demand, and you've set the stage
for a new growth phase. That's been the way things have played
out for electronic design automation software vendorCadence
Design Systems (
CDNS
).

Cadence develops software used by semiconductor and electronic
system customers to design integrated circuits and electronic
devices. After losing money in 2008 and 2009 as the recession
took its toll on the semiconductor industry and Cadence struggled
with internal issues, the company began to rebound in 2010 and
has been on a roll with hefty gains ever since.

Key to its success have been the efforts of Chief Executive
Lip-Bu Tan, who took the helm in early 2009. Tan, along with a
new management team to support him, gave the company a good
overhaul.

Deal Quality

Tan and his team revamped the company's business practices to
focus on deal quality rather than short-term bookings and
revenue, says analyst Richard Valera of Needham & Co. The
strong adherence to deal quality, he says, set the foundation for
much more predictable, sustained growth over the next several
years.

"Their execution on rebuilding the infrastructure of the
company and its renewal pipeline, which had been depleted by the
aggressive practices of prior management, has enabled Cadence to
generate significantly above industry-average growth," he
adds.

That it has, and then some. Cadence has logged nine straight
quarters of double-digit sales growth. Earnings have climbed by
at least double digits in the same time.

If followers are on target, Cadence should keep up its
double-digit gains when it reports fourth-quarter results
Wednesday after the close. Analysts polled by Thomson Reuters see
earnings rising 12% to 19 cents a share. They forecast an 11%
gain in revenue to $340.7 million.

If analysts are right, that would represent a slowdown in its
growth rate from the past several quarters. In the third quarter,
earnings rose 50% to 21 cents a share, topping views. Revenue
grew 16% to $338.5 million. It was the eighth straight quarter
Cadence beat analysts' forecasts for both sales and earnings.

Piper Jaffray analyst Gus Richard estimates Cadence will see
11% top-line growth in the fourth quarter vs. a year earlier and
a 13% increase in earnings per share.

"That's a little bit of a deceleration, but we'll see how it
comes out," he said. "They have consistently met expectations
over the last eight or nine quarters. I don't expect that to
change."

In addition to software, Cadence also offers emulation
hardware that lets customers verify that the chip and software
they're designing in conjunction with it are working prior to
manufacturing the chip. This enables designers of chips for game
consoles and other consumer electronics to speed their products
to market using hardware simulators to run software on a
"virtual" chip long before the actual chip exists.

Valera says the market for emulation hardware began to surge
in 2011. And Cadence, which is the leader in the emulation
hardware market, benefited from this surge, which continued
through 2012. Although the growth in its emulation hardware
business was modest in 2012 relative to 2011, he adds, it's still
been a good source of upside for Cadence throughout 2012, likely
including the fourth quarter.

While Cadence has enjoyed a steady string of quarterly
"beats," Valera says it will be difficult for Cadence to continue
to exceed estimates to the same magnitude it has for the last
couple of years.

"Being four years into their recovery, we think some of the
tail winds from normalization of their license model and renewal
pipeline will be fading and that the magnitude of beats in
revenue and earnings they've been delivering is likely to
mitigate as we proceed into this year," he said.

"There's hardly any microprocessor or chip on the planet that
will not have been touched by software from this company and its
competitors," said Griffin Securities analyst Jay Vleeschhouwer.
"It's become impossible to design them without the use of these
software tools."

As the complexity of chips has increased and their size has
gotten smaller and smaller, he adds, it requires new types of
software and an upgrading of tools to make them.

"The shift to a post-PC era, new products and form factors are
stimulating design activity," said Richard in a report.

"Companies likeMicrosoft (
MSFT
),Google (
GOOG
), Apple (AAPL) and others are increasingly designing their own
chips to take advantage of the shifting landscape and drive their
ecosystems' growth."

Watchers expect Cadence's 2013 earnings to rise 49% to 76
cents a share. They see a 20% pop in 2014.

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